Pence seeks to revamp trade ties with Tokyo

PENCE SEEKS TO REVAMP TRADE TIES WITH TOKYO: Vice President Mike Pence and Japanese Deputy Prime Minister Taro Aso will sit down today in Washington for the second meeting of the new bilateral economic dialogue between the U.S. and Japan, a forum meant to put the two countries’ commercial relationship on a new course. But they will be doing so amid growing frustration in Tokyo with President Donald Trump and his administration’s economic policies, which are centered on the idea of forging a bilateral trade deal with Japan.

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More than half a dozen senior Japanese officials told Pro Trade’s Adam Behsudi that they are uneasy with the idea of launching a two-nation deal meant to replace the Trans-Pacific Partnership, which Trump pulled out of on his third day in office. Officials argue that the goal of the TPP was to create a wide international playing field, and they expressed frustration with the U.S. president’s seeming inability to understand the geopolitical importance of the deal as a counterweight to China’s rising influence.

“Our prime minister has made it quite clear that we respect the U.S. decision. ... That is our official position, but I think withdrawal from TPP is very wrong,” said one senior official. “Honestly, it has diminished many of things that the U.S. has achieved in the region.”

In Japan, the ensuing result has been a heightened interest in negotiating deals with America’s trade competitors — agreements that would undercut a U.S. agricultural industry already suffering from the TPP pullout. Ultimately, though, Japan hopes to persuade the United States to rejoin the Asia-Pacific pact. Officials in Tokyo are also keeping a close eye on the ongoing renegotiation of NAFTA for indications of how the administration’s “America First” agenda will affect its trade relationships with close partners. Read the full story here.

IT’S MONDAY, OCT. 16! Welcome to Morning Trade, where your host is gearing up for one last long day at the Sheraton in Pentagon City. Any trade tips or news out there amid the NAFTA talks? Let me know: mcassella@politico.com or @mmcassella

NAFTA ROUND 4: WHERE WE STAND: The mood at the Sheraton Pentagon City over the weekend was perhaps best summed up in the words of one attendee close to the talks, who described the outlook as “pretty pessimistic.” Industry officials and representatives from various trade associations and labor unions milled in the lobby and around the hotel bar, wondering aloud how close Washington might be getting to walking away from the table entirely.

USTR held a late afternoon USTR briefing for cleared advisers. As talks continue today, here’s a rundown of some of the primary points of discussion:

— Trade deficits. Representatives from the business community, agriculture groups, organized labor and other concerned parties were given a stark reminder of why they were hanging out in a nondescript hotel conference room on a Sunday afternoon: The Trump administration wants to renegotiate NAFTA in order to reduce the U.S. trade deficit.

That was the opening message from Daniel Watson, the deputy assistant U.S. Trade Representative for North America, according to sources familiar with the briefing. Less clear was which of the U.S. proposals — ranging from a major overhaul of the automobile rules of origin to disarming the pact’s dispute settlement provisions — USTR thought would directly achieve the goal rebalancing America’s trade with Canada and Mexico, sources said.

— Dairy. Two days of talks centered on the agriculture chapter focused at least in part on dairy. The U.S. made a proposal to reverse a Canadian pricing program that has undercut certain U.S. dairy exports north of the border. The text, which demands that Canada eliminate an industry pricing classification that lowered domestic prices for certain milk protein concentrate products to the minimum global price, was met with swift pushback from those who see it as a direct threat to Canada’s supply management system. It does not include any language on market access, as those provisions will be negotiated separately. Read more from Adam and yours truly here.

-- A ‘full assault’: Sources familiar with the U.S. position characterized the proposal as a five-page attack on Canada’s supply management system that not only demands the elimination of the new price class on milk protein concentrates, but also includes onerous “transparency” requirements for Canada to report pricing decisions. (Supply management sets up a system that stabilizes income for dairy farmers by limiting supply, restricting imports and setting prices on milk.)

“The United States is preparing a full assault on Canada’s supply management system,” said Christopher Monette, director of public affairs for Teamsters Canada. The labor union represents about 35,000 to 40,000 workers in the country’s dairy industry.

— Auto rules of origin. The United States formally introduced proposal to drastically tighten the rules of origin for automobiles, calling for the amount of content in a car that must be sourced from a NAFTA country in order to be eligible for tariff benefits to rise to 85 percent from its current 62.5 percent. Washington has also proposed for the first time a U.S.-specific content requirement, which would mandate that 50 percent of a car produced in Canada or Mexico be sourced from within the United States in order to qualify for duty reductions.

USTR’s proposal also calls for the domestic content provision to come into effect immediately and for the rules of origin to rise over a two-year phase-in period – a time frame critics are saying is far too short.

— Seasonal produce. Mexico gave a hard “no” to the produce proposal on Friday sending its first clear, united signal that the proposal would be fought. The Mexican government and private sector would “for no reason accept the seasonality clause,” said Bosco de la Vega, president of Consejo Nacional Agropecuario, Mexico’s main agriculture group. De la Vega referenced a conversation he had with Mexico’s ministers of agriculture and economy last week, when all agreed that the proposal was a nonstarter. The only effect the proposal would have, if enacted, he said, “is that my associates in Mexico will ask for seasonality in grains, soy, corn, meat and all the products that affect the Mexican industry.” More from Sabrina here.

An industry compromise appears elusive, dividing fruit and vegetable growers in the United States. Tom Stenzel, president and CEO of the United Fresh Produce Association, summed it best: “I feel like I’m on a tightrope.” More from Adam here.

CANADA, MEXICO: WE’RE NOT WALKING AWAY: No matter how extreme Ottawa and Mexico City may consider some of the United States’ latest proposals, both countries have made clear in recent days that they will not be scared or forced away from the negotiating table. Canadian Prime Minister Justin Trudeau said during his trip to Mexico City last week that Canada “will not be walking away from the table based on the proposals put forward.” His comment came in response to a question specifically asking whether the sunset clause, which the U.S. tabled earlier this round, would be a dealbreaker.

In a speech on Friday, Mexican Finance Minister Jose Antonio Meade reiterated to Reuters that Mexico was also working under the assumption that the three countries will be able to reach an agreement. “The main scenario that we’re working on is that there is scope in the negotiation of the agreement for a consensus that benefits the three countries,” he said. “That’s what’s driving us in a negotiation we’re taking part in good faith.”

Trudeau and Mexican President Enrique Pena Nieto also “stressed the importance of strengthening economic ties” between their two nations, according to an official readout of the visit, which wrapped up on Friday. In an address to the Mexican Senate, Trudeau emphasized his confidence that the three nations would reach a “win-win-win” deal.

The strategy appears to be to present a united front that neither Canada nor Mexico would be frightened or bullied into walking away from the negotiations. That would put the onus on Trump as being the uncompromising one if he is the one who walks away. Thus, he would have to answer to the American public, should there be negative economic consequences or a backlash.

CHINESE TRADE SURPLUS OVER U.S. REACHES NEW PEAK: This is likely to be in the daily Oval Office briefing: The Chinese trade surplus with the United States rose in September to the highest level on record for a single month, Reuters calculated using official data dating back to 2008. It’s a statistic that’s sure to rile a White House almost singularly focused on reversing the country’s bilateral trade deficits. The number jumped last month to $28.08 billion from $26.23 billion, according to Chinese customs data released on Friday.

During the same month, China’s exports to North Korea dropped 6.7 percent versus the same time period a year ago, while imports plummeted 37.9 percent, Bloomberg reported.

PLAYLIST PLUG: We needed something lighthearted to get us through NAFTA negotiations this weekend, so we’ve continued to add to our Spotify playlist, which puts to lyrics how the talks are going so far. There are a fair number of optimistic titles on the list — “I Will Survive,” for one — but amid news that the three countries continued to butt heads on a growing number of sticky issues over the weekend, one reader commented that Taylor Swift’s “We Are Never, Ever Getting Back Together” may soon need to be added.

Perhaps in a sign of the relative lack of concrete news coming out of Round 4, the playlist even made headlines in Canada. Listen here, and keep the suggestions coming our way.

KELLY WORKS TO STAFF UP AGENCIES: White House chief of staff John Kelly is reversing an onerous process established under his predecessor for filling vacant political positions across the executive agencies. The new approach would give Cabinet secretaries more autonomy to pick political appointees, POLITICO’s Nancy Cook reports.

Kelly’s goal, according to 10 interviews with White House officials and advisers close to the administration, is to do a better job of finding candidates for the hundreds of jobs throughout the administration that remain vacant.

Kelly entered the White House with an unusually clear understanding of the flaws of the personnel process, according to two people close to him. Read the full story here.

INTERNATIONAL OVERNIGHT

— Capitol Hill aides who work on trade have begun asking when, not if, Trump is going to send his NAFTA withdrawal notice, Axios reports.

— The Wall Street Journal editorial board says a withdrawal from NAFTA would be an economic blunder of historic proportions.

— Rep. Richard Neal (D-Mass.), the ranking member on the House Ways and Means Committee, told Canada’s Global News that withdrawing from NAFTA will be “a much more difficult task” than Trump may be expecting.

— Subsequent NAFTA rounds look set to be extended as the year-end deadline looms, Reuters reports.

— Mexican Finance Minister Jose Antonio Meade said his country was looking to forge trade agreements in the Middle East and Turkey as the country fears an end to NAFTA, the PanAm Post reports.

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About The Author : Megan Cassella

Megan Cassella is a trade reporter for POLITICO Pro.

Before joining the trade team in June 2016, Megan worked for Reuters based out of Washington, covering the economy, domestic politics and the 2016 presidential campaign. It was in that role that she first began covering trade, including Donald Trump’s rise as the populist candidate vowing to renegotiate NAFTA and Hillary Clinton’s careful sidestep of the Trans-Pacific Partnership.

A D.C.-area native, Megan headed south for a few years to earn her bachelor’s degree in business journalism and international politics at the University of North Carolina at Chapel Hill. Now settled back inside the Beltway, Megan’s on the hunt for the city’s best Carolina BBQ — and still rooting for the Heels.